Γιάννος Παπαντωνίου: Greece’s Economy Crisis and Exit Strategies

It is a particular pleasure to be back at the LSE, see old friends and colleagues, and have the opportunity to address critical issues, such as the fate of the eurozone and Greece’s place in it. I would like to thank, once again, Kevin and Maurice for organizing these events, and also for creating the framework, within this remarkable institution, for engaging a wider audience in discussing these issues.

Greece’s crisis is intertwined with the eurozone crisis so that exit strategies can only be considered in the wider context. Looking back at the origins of the eurozone debt crisis it can be argued that the large external imbalances that were allowed to emerge over the last decade between the core and the periphery account for much of the problem encountered today. The competitive position of peripheral countries, particularly Greece, Spain, Portugal, Ireland and Italy, deteriorated sharply vis-à-vis the core countries of the eurozone. Lax fiscal policies and failure to promote productivity-enhancing reforms contrasted with the more disciplined and ambitious policies pursued in most core economies, particularly Germany. The persistence of these imbalances has transferred excess savings from the surplus core economies to the periphery creating the conditions for over-borrowing.

In fiscally responsible countries like Spain, excess savings resources have been borrowed by the private sector and invested in what later became bubbles-housing assets. Bad debts were eventually assumed by the government leading to an explosion of budget deficits and full-blown fiscal crises. In fiscally profligate countries like Greece, excess savings resources have mainly been borrowed by the government leading directly to a fiscal crisis.

Two years after the eruption of the crisis in Greece, a country accounting for no more than two percent of the eurozone’s GDP, it is remarkable that the area’s leaders have not found a way to confront it, still less to limit the contagion to other members of the currency union. The explanation partly lies in the fact that the euro is a unique experiment requiring special treatment. However, the politics of implementing the right remedies has proven to be exceptionally complicated. The challenges facing the eurozone in its effort to overcome the crisis and restore conditions for stability and growth are threefold:

Discipline, by establishing rules and procedures for preventing – or discouraging – the emergence of fiscal imbalances.

Stability, by reinforcing competitiveness and promoting macroeconomic policies to curb excessive external deficits/surpluses which constitute the root cause of domestic financial imbalances, public or private.

Reconstructing the governance of the monetary union along these lines – solidarity, discipline, stability – implies a qualitative leap towards economic and political integration.